Turbulence in euro zone debt markets has pushed benchmark German borrowing costs to climb above zero for the first time in nearly three years, a sign that investors believe major central banks are about to pull back on their pandemic-era stimulus.

The country’s 10-year bond yield climbed to -0.03% last week, its highest level since May 2019. global decline The most important reference point for the spread of government debt prices to European markets. It was as low as minus 0.4% in the middle of last month.

The rapid recovery in yields led by the U.S. reflects Increased investor confidence The Omicron variant would not derail the global economic recovery, potentially allowing central banks to reduce purchases and raise interest rates.

“ECB demand is very important to the negative yield story,” said Mike Riddell, portfolio manager at Allianz Global Investments. “It makes sense that fewer purchases would lead to an increase.”

Italian 10-year bond yields also rose to an 18-month high of 1.32% last week, led by German bunds. Eurozone inflation It hit a new record of 5% last month.

German 10-year bond yields dipped below zero for the first time in 2016 after the European Central Bank cut interest rates below 0% in response to the last major challenge: the Greek debt crisis. The once-unthinkable shift in yields into negative territory means investors are actually willing to pay Berlin for the privilege of lending money to the country, even for a decade.

Yields have since recovered, but ECB stimulus relaunches in the face of economic slowdown back below Zero in 2019. The Covid outbreak means they stay there.

At its December meeting, the European Central Bank Announce After its emergency bond-buying program ended in March, it continued its asset purchases, but at a slower pace than investors had expected. This, coupled with signs that the US is gradually tightening policy, has pushed this reference rate back to a tipping point.

some economists Worry Germany is likely to slip into recession – two consecutive quarters of negative growth – due to restrictions imposed to curb the spread of Omicron.

However, most believe this will delay but not end a rebound in Europe’s largest economy and still expect strong growth in Germany this year, supported by high levels of public spending under the new government Until stricter fiscal rules are reinstated next year.

Sven Jari Stehn, chief European economist at Goldman Sachs, said the bullish outlook meant he expected German 10-year bond yields to hit 0.3 percent by the end of the year.

“The combined rise in European bond yields and equity prices since the shift in global monetary policy in mid-December suggests that the rise in German bond yields is largely due to improved growth sentiment,” he said.

Germany has suspended budget deficit limits in response to the pandemic, but its historic aversion to easy fiscal policy has led to a shortage of German government bonds in recent years, while the European Central Bank has snapped up a growing share of the market.

But the creation of the EU’s 800 billion euro recovery fund, backed by Berlin, has raised Brussels’ own debt to become benchmark asset Compete with the Bund. Meanwhile, incoming German chancellor Olaf Scholz has said he has a bigger stance on borrowing than his predecessor Angela Merkel – albeit on a constitutional note on budget deficits within the limits.

Some investors believe the shifts could help ease Germany’s debt shortfall relative to more liberal spending governments such as Italy.

“you have [EU] A recovery package, then a change of government in Germany,” said Ludovic Colin, bond portfolio manager at Vontobel Asset Management. “They didn’t become Italian overnight, but they could become a little more Italian.

“If fiscal policy is now going to help create growth and potentially inflation, then the ECB needs to keep rates at [minus 0.5 per cent] may disappear,” he added.

Still, some analysts remain skeptical of the sudden upheaval in German yields. Camille de Courcel, head of European strategy for G10 rates at BNP Paribas, said the ECB’s purchases would still be 17 billion euros higher than Germany’s expected net bond issuance of 54 billion euros this year, even if they were 88 billion euros lower than last year. “We expect the sell-off to continue through the end of the year, albeit in limited ways,” she said.

Rabobank strategist Richard McGuire said markets are now pricing in a rate hike by the European Central Bank this year, an unlikely prospect given the squeeze on living standards due to high inflation.

“It’s hard for German yields to escape the gravitational pull of negative territory,” he said. “We have clients telling us that if they hit zero, it’s time to buy. A positive risk-free rate in the euro zone would be a huge change, but I find it hard to believe it’s a regime change.”